Spending power squeezed as cost of essential items rises more than twice as fast as wages

The squeeze on people’s spending power continued in April, with wages rising at the slowest pace for more than a year and by less than half as fast as the price of essential items.

The official rate of inflation has generally been falling in recent months, but the benefits of this is being offset as pay is still rising more slowly than the cost of living.

Incomes grew by just 2.2 per cent in April – down from 2.4 per cent the previous month - and the slowest pace since February 2011, according to the Lloyds TSB Spending Power Report. At the same time, spending on essential items was up 4.6 per cent.

Downward trend: Family finances are getting hammered as consumer spending power is squeezed.

The spending power drain means £100 less a year to spend on non-essential items, the report says.

Meanwhile, 86 per cent of consumers noticed an increase in the cost of essentials and everyday spending compared to the same time last year, up from 73 per cent in March.

Two-thirds of people think they’re paying more for petrol and 60 per cent believe that groceries are more expensive. The latest ONS figures showed the UK's official Consumer Prices Index inflation measure at 3.5 per cent in March.

While negativity towards the economy increased, with more than half of people asked believing that the UK’s financial situation is 'not at all good.'

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Patrick Foley, chief economist at Lloyds TSB, said: 'Household finances are still under real pressure despite the significant falls in inflation we have seen over the past seven months. Although unemployment has been broadly stable, wage growth as eased and so incomes are growing well below their long term average'.

'Even though we expect to see further falls in inflation, the weakness in the broader economy is likely to mean that consumers aren’t going to feel any better off in the future.'

Spending on essential items was up 4.6 per cent on a year ago but April's reading was in-line with that of the previous two months, meaning the sharp acceleration seen at the start of the year appears to have ended.

Jatin Patel, Lloyds TSB director of current accounts, said: 'There was little respite for consumers in April and it is clear that a growing number are feeling concerned about the state of the UK's economic situation.

'This will not have been aided by news suggesting that the UK has entered into a double dip recession, while continued weak income growth and rising prices act as a very tangible drag on sentiment.

'While spending power is not being eroded at quite the same pace as the beginning of last year, events in the global economy will likely have a significant bearing on consumer spending power in the months ahead.'

The Lloyds TSB Spending Power Report is based on a survey of 2,380 consumers conducted by TNS Financial and Professional Services.

A separate survey also reported on the pressure on household’s finances and squeezed consumer spending prospects.

The May Markit Houshold Finance Index reached a four month low, partially due to the increased pressure on public sector workers who reported the worst deterioration on their finances so far this year.

The report claimed that while squeeze on household finances remains less than it was in August last year, the third month of deterioration in its index 'reinforced belief that life is going to be generally difficult for households for some time to come' and this will limit consumer spending power.